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THE SHARES OF VAIL RESORTS, AMERICA'S LARGEST ski area, have been going downhill faster than you can say "schuss." With fears of a recession gripping the lodging sector, Vail's stock has dropped some 28% in the past three months, to about 47.

The company's clientele -- the surging ranks of the world's wealthy -- is relatively insulated from economic slumps. Heavy snowfall in the past two months, meanwhile, has been whetting the appetites of both skiers and a new breed of young visitors: snowboarders.

Record snowfall in December and January in the West bodes well for the ski and lodging businesses. Care for a new $3,000-a-night hotel room?

Perhaps most important, a number of promising residential developments by Vail are starting to come to fruition. The company is developing hundreds of townhouses and condos in its area, and demand is proving remarkably strong.

The company, the only publicly traded ski area, has been operating since 1962, when Vail Mountain opened in Colorado under the ownership of Vail Associates. Vail, which was bought out of bankruptcy by Apollo Partners and Leon Black, went public in 1997, after it merged with Ralston Resorts, a spinoff of Ralston Purina.

In the next few years, the company acquired hotels in mountain villages and bought Wyoming's Grand Teton Lodge, created in the 1920s by John D. Rockefeller, gaining a source of revenue during the skiing off-season. It also owns luxury-hotel manager RockResorts, and recently has been adding to those properties.

Vail, which has a market value of $1.8 billion and gets more than 70% of its revenue from its mountain-skiing business, is hard to compare with other companies. But Jeffrey J. Donnelly, who follows the company at Wachovia, figures the stock is way undervalued.

Based on the norms for the lodging industry and the price that another ski mountain, Intrawest, fetched in a buyout, Donnelly thinks that Vail should trade at a ratio of enterprise value, or market value plus net debt, to Ebitda of 10 excluding real estate. Ebitda, a measure of cash flow, is earnings before interest, taxes, depreciation and amortization.

A 10 Ebitda multiple would be below the average of any hotel company, and even further below the 11.5 that some luxury-hotel chains command -- nonetheless, it would value the shares at about 53, or 13% above the current level. Add to that the present value of Vail's real-estate projects through 2012 -- some $14 a share by Donnelly's calculations -- and the stock would be trading at $67, a 42% premium to its current price.

Cory Gilchrist, portfolio manager of Marsico 21st Century and Marsico Global Fund, Vail's largest shareholder, has a similar price target, based on his view of the real estate's value and his expectation that the resort business' Ebitda will grow a hefty 12% to 14% in the next few years.

"Based on global currency movements, this is an on-sale real-estate asset," says Gilchrist, noting that Europeans have been drawn to Vail after facing poor snowfall in their own countries last season; and the weak dollar certainly adds to its appeal. "Ski properties are like beachfront properties, and there are significantly fewer ski acres than beachfront acres," he adds.

Vail has several hundred new residential units in the works, and the first ones coming online are fetching prices as lofty as the nearby summits.

For example, prices at One Ski Hill Place at Breckenridge, a luxury-condominium residence that was just launched, were raised more than 20% from those at Crystal Peak, a project sold in the same area a year ago, according to Jeff Jones, Vail's chief financial officer.

"The pricing was done with a full awareness of what was going on in the global real-estate market," he says. With a limited number of residences being sold -- a total of 90 in the first building -- "buyers are confident they're getting something that may never be available again," he adds.

The 67 condos at another Vail project, the Arabelle at Vail Square, a European- style village, have been sold out for two years; the project has already seen its first closings. The hotel portion, the crown jewel of the development, commands rates for suites at the height of the ski season of as much as $3,079 a night.

That shouldn't be too daunting for some of Vail's customers, whose average household income is $175,000. That average includes both destination visitors, who come from far away to vacation and represent more than 60% of skier visits, and the 36% of those from locations near its four Colorado mountains -- Vail, Keystone, Breckenridge and Beaver Creek -- and Heavenly, its Lake Tahoe, Calif., mountain.

VAIL'S CLIENTELE IN THE 2007 fiscal year, ended July 31, helped it achieve the most skier visits of any ski area in the U.S. last season, 6.2 million. Vail doesn't report monthly traffic numbers, but near-record snowfall in December and early January in the West bodes well for the winter season. Heavenly mountain in Lake Tahoe, where snowfall last year was poor, experienced 10 feet of snow in early January. As a result of white stuff like that, all of Vail's resort mountains are 100% open.

Hayley Wolff, an analyst at Rochdale Research, predicts a 5% to 6% increase this year in visits from destination guests, who on average spend as much as four times a day more than the local visitor's $107 typical outlay on lodging, food, equipment and skiing lessons. She adds that Vail is also starting to attract many more young adults by marketing to snowboarders.

Wolff projects that Vail will rack up nearly $1 billion in real-estate cash flow over the next six or seven years, and she sees the resort business alone generating enough cash flow to buy back 40% of its common stock by 2011. (It continues stock buybacks, with 1.8 million shares available under an existing repurchase plan.) The company's balance sheet is strong, with long-term debt at about $534 million, or 29% of capitalization.

And what happens to all these premier assets if the economy goes south? Over the years, Vail's real estate has shown little to no correlation to the economic cycle, says Wachovia's Donnelly. Plus, Donnelly's analysis shows that in Summit County, Colo., where many of Vail's new projects are located, average sale prices rose 15% through October 2007, and that since 1991, average prices in that county declined only once, in 2003, by 1.4%.

The Bottom Line

The shares, which have fallen sharply in the past three months, look poised to climb by 40% or more.

"Even in soft years for the country, they keep growing," he says, mainly because of the limited supply and growing global demand. "It's surprising to me how many people will buy a $2 million vacation home and use it for three weeks out of the year."

Donnelly also found little to no correlation between economic changes and skier visits at Vail Resorts, including income growth for the top 20% of the U.S. population. That is, even when incomes of the affluent slip, they still manage to get away on ski vacations.

Wolff of Rochdale notes that Vail has other advantages to traditional lodging companies, including a stable source of income from local skiers, many of whom buy season passes well before the season opens, as well as solid pricing power and limited competition. She figures that Vail will be raising its effective ticket price at least 5.5% this year.

In fiscal 2008, Vail's reported resort cash flow is expected to rise by as much as 11%, but with the addition of real-estate cash flow, net income could nearly double to $3 a share. Now that's an exhilarating mountain high.